Corporate crunch forces studio rethink

That’s essentially the question the Hollywood studios find themselves addressing these days. The question sounds facetious, if not surreal, but, in point of fact, some serious soul searching is going on, fueled in part by recent (and secret) industry studies demonstrating a slow but significant decline in core audience.

In the beginning, the business model for Hollywood studios was clear-cut: They financed the development and production of a slate of movies, drawing on a roster of stars and filmmakers, and presided over their distribution to wholly owned theaters.

But that model continues to evolve. The theater circuits were spun off long ago and the star contracts terminated. These days, production costs increasingly are being out-sourced to hedge funds and other financing groups. And overseas entities often cover marketing and distribution costs in distant territories. Essentially, every aspect of studio overhead is now under serious scrutiny by corporate numbers crunchers.

And along comes MGM, which hopes to thrive on another business model entirely: MGM doesn’t plan to pay for development costs on its films or even to cover the production tab (except for the James Bond and “Pink Panther” franchise films). In some cases, it will pick up some or all of the cost of prints and advertising, but it’s looking to outside entities to carry the risk on its substantial release slate.

Will Leo the Lion be able to become a major player again under this sort of game plan?

Rival studio chiefs are dubious, but they are also envious. Their corporate parents keep dispatching mandates that costs must be cut and staff trimmed, but they are trapped within long-established management structures.

Development once was an essential activity for the studios when major stars were under contract and casting could be preordained. Today, studios are writing off $150 million or more in a single year for projects that were pre-destined for failure. And when regimes change, as happened at Paramount, the writeoffs balloon even further.

All of which raises the ugly question: How much of this activity could be outsourced? Could the entities that are funding their own slates also fund their development?

Even further: Does each studio have to maintain its own staff to preside over post-production? Some believe stand-alone companies could provide most of this support work, reducing costs and relieving the studios of overhead.

The key objection to this sort of thinking, to be sure, is that studios should not surrender their basic creative mission. The assembly line will stand idle, for example, if studio development teams don’t marshal new projects and if dedicated post-production cadres aren’t standing by to supply the finishing touches.

All that is true, except for one reality: As the studios have become progressively bigger, overheads have continued to expand and, more disturbing, studio functionaries have become ever more bureaucratic. There’s almost always an inverse ratio between the size of an organization and its level of creative output.

Sir Howard Stringer, who presides over the massive multinational called Sony, observed recently that “corporate islands,” as he termed them, demonstrated by far the greatest entrepreneurial energy within large organizational structures. Thus, when conglomerates set up fairly autonomous units assigned to specific projects — PlayStations, for example — they turn out to be more flexible and innovative than conventional sectors.

Would the same prove true at the studios? Indeed, the newly reconstituted DreamWorks represents that sort of “island” within Paramount, operating with autonomy on its own slate of films, devoid of much of its former overhead and ancillary distractions. One or two of the hedge funds now pouring money into the studios also are examining structures of this sort.

Behind all this is a very simple proposition: The model of the traditional studio no longer seems either nimble or profitable.